Posted on the Wall Street Journal by Peter Eavis:
More than half of U.S. residential mortgages are being made by just three large banks.
Right now, housing remains on government life support. Treasury-backed entities are guaranteeing about 85% of new mortgages, while the Fed buys 80% of the securities into which these taxpayer-backed mortgages are packaged.
The optimistic take is that this support, though large, will shrink when market forces regain confidence. But there is a darker possible outcome: The emergency assistance is entrenching a system in which the taxpayer takes the default risk on most mortgages, while a small number of large banks get a larger share of the fee revenue from originating and servicing mortgages.
That is what is happening now. While big banks are originating lots of mortgages, they are selling nearly all of them to Fannie Mae and Freddie Mac. Indeed, combined single-family mortgages held on the balance sheets at J.P. Morgan, BofA and Wells actually fell 3.5% in the first half. Before the bust, these banks sold large amounts of loans to Fannie or Freddie, but they also held on to products like jumbo mortgages. The volumes for those large loans now have tumbled.
And even as their mortgage holdings fall, these banks are posting big jumps in fee revenue from mortgage banking. Combined, it was $14 billion in the first half, up more than threefold from $4.1 billion in the year-earlier period.
Granted, some of this increase came from marking up mortgage-servicing assets, but fees from writing huge amounts of new loans, fueled by refinancing, caused revenue to soar at BofA and Wells.
And these blowout revenues are partly down to increased market share following big mergers, like BofA's acquisition of Countrywide.
The three originated 52% of mortgages in the first half, according to Inside Mortgage Finance, just over double these banks' market share in 2005. In servicing, their share is 49%, compared with 22% in 2005.
Regulators signed off on the mergers that caused this dominance. Even without the urgency for saving weak banks created by the crisis, regulators have never focused primarily on mortgage share. That suggests they won't worry about increased concentration. What's more, they may like it that most mortgages go through three banks that they intend to regulate heavily.
Will the big three benefit? Large market share in mortgages could act as a drag if the housing market languishes after government support recedes. That could come sooner than some think; the Fed's special $1.25 trillion program to buy Fannie and Freddie securities is two-thirds complete and is scheduled to close at year-end. But getting a strong grip on mortgage-fee income, and avoiding credit and interest-rate risk by selling loans to the government, could turn out to be a money-making strategy, even if mortgage origination drops off.
And by making themselves indispensable for the functioning of the mortgage market, these banks are more likely to be rescued if they get into trouble.
Rather than trying to implement change, the government appears to be reinforcing a system in which it provides subsidies to an asset that periodically goes through highly leveraged speculative booms.
Despite the bust, conforming mortgages that qualify for government backing remain mispriced. That can be seen in the fact that banks have no desire to keep the most common mortgage on their books. Wells's chief executive, John Stumpf, recently said: "We're not putting on 30-year [fixed-rate] mortgages at these rates."
So why should the taxpayer take them?